IMF considers imposing ‘one off’ wealth tax

Many in the US may be surprised how governments and institutions react in the long term to solve the global economic crisis.  Those in Asia and Europe may not be.  Simply, the economy is not producing enough to cover the losses.  If the US continue down this path, at some point in the future tax receipts will only cover interest payments on the debt.  As time progress, governments will look to seize assets in any means possible.  Raising taxes is not politically easy, so they will look for other ‘creative’ ways to raise money.  Recently Italy put up some of it’s most valuable real-estate such as the Orsini Castle up for sale.  But state assets will only go so far.  Governments and institutions will look elsewhere; first to the ‘low hanging fruit’ as they call it.  From the IMF report:

“The sharp deterioration of the public finances in  many countries has revived interest in a “capital levy”—  a one-off tax on private wealth—as an exceptional  measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be  repeated, does not distort behavior (and may be seen by some as fair). There have been illustrious supporters, including Pigou, Ricardo, Schumpeter, and—until he  changed his mind—Keynes. The conditions for success  are strong, but also need to be weighed against the risks  of the alternatives, which include repudiating public  debt or inflating it away (these, in turn, are a particular form of wealth tax—on bondholders—that also falls on nonresidents).

There is a surprisingly large amount of experience to draw on, as such levies were widely adopted in Europe after World War I and in Germany and Japan after World War II. Reviewed in Eichengreen (1990), this experience suggests that more notable than any loss of credibility was a simple failure to achieve debt reduction, largely because the delay in introduction gave space for extensive avoidance and capital flight—in turn spurring inflation.

The tax rates needed to bring down public debt to  pre-crisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.”

What is interesting about this is that the IMF is supposedly an international organization.  Until now, there is no ‘world government’ although there are international bodies such as the United Nations.  With the exceptions of war treaties such as the Treaty of Versailles in modern times the concept of an international tax has not been proposed.  And who would collect it?

Also strangely, as the author of an article on the topic Pater Tenebrarum points out, the IMF and its’ workers exist in a tax free zone.

While the report is of an academic nature, it is interesting to see a shift in thinking.  Also interesting is that the IMF is funded indirectly by those who would suffer most from such a tax.  If the Cyprus bail-in didn’t happen, and if bail-in policy wasn’t becoming the de facto goto plan when a government needs money in many regions, an report like this might go unnoticed, or disregarded.  But considering just 2 days ago the US Treasury nearly defaulted on its’ obligations and the US government was shut down, it’s an interesting paper that will likely be referenced by politicians and policymakers in the coming weeks as they struggle to find solutions to the global financial crisis.

Further Reading:

IMF Report PDF